Territorial Spate to Slow Offshore Gas Progress in the Philippines

Strong demand for gas, especially in the rapidly growing Southeast Asian economies, means that finding new sources of hydrocarbons is more important than ever. With natural gas prices in Asia being the most expensive in the world, countries competing for new supplies have never been higher.

The Philippines, like its neighboring countries Malaysia and Indonesia, has been focusing its efforts on developing its gas assets further offshore.

With the production levels of its existing reserves falling, and the potential of recently tendered blocks yielding lower-than-expected success, Manila has started looking further afield to secure its primary energy needs.

But the country has discovered this year that its quest for new gas supplies will not come easy, as it is not the only one seeking to meet its power needs beneath the waves.

Gas Blocks Offshore the Philippines

There are two major offshore areas that lie underneath waters in the Philippines, which potentially holds gas reserves that can not only meet the country's domestic power needs but also provide enough excess material for export.

The first is Benham Rise, an undersea land mass that is located in the north eastern tip of Luzon. Spanning across an area of over 50,000 square miles, the site which is home to extinct volcanic ridges is believed to contain large quantities of oil and gas.

The country's Department of Energy (DOE) revealed in September that it aims to offer gas projects in Benham Rise next year.

"It would be nice to do it alongside [during] the Philippine Energy Contract Round (PERC) 5," the DOE told local media.

PERC is the DOE's public contracting round for upstream petroleum service contracts. The bulk of these contracts are located in the offshore Palawan Basin. But after the United Nations awarded Benham Rise to the Philippines in September, the DOE quickly drew up plans to include the area in its upcoming PERC.

The second more contentious area is the highly-disputed Spratly Islands chain, situated in the West Philippine Sea. Known also to Beijing as the South China Sea, the area is widely believed to contain massive gas reserves, and has consequently drawn strong interest from the bordering states of Brunei, China, Vietnam, the Philippines, Taiwan and Malaysia.

The U.S. Energy Information Administration said in a March 2008 report that areas surrounding the Spratly Islands could hold as much as 266 trillion cubic feet of gas. Chinese media has gone as far to term the South China Sea as "the second Persian Gulf."

Beijing Blocks Access to the Spratly Islands

Given its growing thirst for energy, and in particular natural gas, China has long claimed the South China Sea as its territorial waters. Citing a series of somewhat unclear historical claims, dating back to the Han and Ming dynasties, China in 2009 submitted a "nine-dash line map" to the United Nations documenting almost all of the South China Sea – including the Spratly Islands – as its territory. This plan has been fiercely contested by the Philippines at the UN.

The continued disagreement – most noticeably between China, the Philippines and Vietnam – had led to near-military confrontation between the countries.

Relations between the three countries plummeted to a new low this year, when state-backed China National Offshore Oil Corporation (CNOOC) announced June 25 that it would open nine offshore blocks in the South China Sea for joint cooperation with foreign companies. CNOOC's announcement drew sharp criticism from both the Philippines and Vietnam. China consequently responded July 1 with a deployment of four combat-ready patrol ships into the disputed waters.

The tension surrounding the Spratly Islands – now widely known among industry watchers as the biggest trouble spot for military confrontation – appears set to heighten moving into 2013. In the latest turn of events, Beijing announced in November that it plans to board and search ships that illegally enter what it considers as its territory in the South China Sea.

Contending with Chinese-Built Ultra-Deepwater Rig

The Philippines has to meanwhile keep an eye out for the locally built Hai Yang Shi You 981 (UDW semisub) – owned by CNOOC – which is currently drilling south of Hong Kong, an area within Beijing's ambit.

In a report published by Reuters Energy Review, a Chinese think-tank said that Beijing could eventually move the rig further south into the South China Sea/West Philippine Sea, into disputed territorial waters.

"With Chinese offshore drilling technology improving, it is just a matter of time for them to enter the central and southern part of the South China Sea," Reuters quoted Liu Feng, senior researcher at the state-backed National Institute for South China Sea Studies in its report.

Other industry watchers however say that China is unlikely to take any decision soon on the $1 billion prestige-symbol rig.

"Here, commercial and political priorities may pull China in different directions," Dr. Euan Graham, a senior fellow in the S. Rajaratnam School of International Studies told Rigzone in his analysis of the situation.

"As a state-owned company, CNOOC must respond to political pressures … Nonetheless, CNOOC is also under pressure of increase its revenue after it saw profits dip 19 percent in the first half of this year. Even if Hai Yang Shi You 981 has the capability to explore further south than CNOOC has been able to operate previously, it may still be uneconomical to pipe oil and gas back to mainland terminals," Graham added.

Moving into 2013

The Philippines could be looking at a rocky path for its offshore gas development projects moving into the next year. The country could face substantial difficulties in attracting investment dollars, given the political tensions in the West Philippine Sea.

While joint development is an oft-repeated mantra that has failed to deliver where territory is disputed in the South China Sea, in the case of the Philippines, achieving some form of resolution with China in 2013 will be critical for the country's offshore gas sector.

Entering into 2013, the Philippines should seek to reach an agreement with the Association of Southeast Asian Nations (ASEAN) claimants, which would simplify the more pressing requirement – for the country – of arriving at a common position vis-à-vis China (and Taiwan).

Without a clear resolution on the Spratly Islands dispute, the Philippines will perhaps never be able to fulfill its goal of having natural gas taking a larger role in its energy mix, and ultimately developing as a truly self-reliant nation for its natural gas needs.